Futures Markets: Speculator Participation and Risk Premiums

Abstract

This study seeks to determine whether changes in future prices are determined by the shifting of price risk and the presence of risk premiums in transactions between hedgers and speculators. The alternative explanation is that the returns accruing to speculators are a result of the superior forecasting ability processed by speulators. The study examines the characteristics of price movements and net hedging positions in twenty‐nine futures markets.The results of the study are consistent with the presence of both risk shifting to speculators and superior forecasting ability of speculators in futures markets. While the risk bearing explanation may be valid for particular markets under special conditions, forecasting ability may be present in other markets.The implication is useful for investors in determining which markets may reflect ongoing and unidirectional price changes.

Citation

Lee, J.W. and Beneda, N. (2005), "Futures Markets: Speculator Participation and Risk Premiums", Management Research News, Vol. 28 No. 6, pp. 1-17. https://doi.org/10.1108/01409170510784841